Archive for the ‘Eye on the Legislature 2013’ Category

In its usual last-minute frenzy, the Iowa General Assembly passed a bill (HF 625) to extend the popular School Tuition Organization credit. The credit is 65% of the amount contributed to organizations that subsidize private elementary and secondary tuition. When combined with the federal tax deduction for the donation, there is very little out-of-pocket cost for the donations. The amount of the credit is limited, so it has been oversubscribed in recent years. the bill increases the cap starting in 2013.

The bill has a surprising amendment that passed yesterday: it now creates “affiliate nexus” in Iowa (my emphasis):

(1) A retailer shall be presumed to be maintaining a place of business in this state, as defined in paragraph “a”, if any person that has substantial nexus in this state, other than a person acting in its capacity as a common carrier, does any of the following: (a) Sells a similar line of products as the retailer and does so under the same or similar business name. (b) Maintains an office, distribution facility, warehouse, storage place, or similar place of business in this state to facilitate the delivery of property or services sold by the retailer to the retailer’s customers. (c) Uses trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the retailer. (d) Delivers, installs, assembles, or performs maintenance services for the retailer’s customers. (e) Facilitates the retailer’s delivery of property to customers in this state by allowing the retailer’s customers to take delivery of property sold by the retailer at an office, distribution facility, warehouse, storage place, or similar place of business maintained by the person in this state. (f) Conducts any other activities in this state that are significantly associated with the retailer’s ability to establish and maintain a market in this state for the retailer’s sales. (2) The presumption established in this paragraph may be rebutted by a showing of proof that the person’s activities in this state are not significantly associated with the retailer’s ability to establish or maintain a market in this state for the retailer’s sales.

This ratifies the aggressive approach of the Iowa Department of Revenue on intangible nexus, and will likely trigger more audits of out of state companies. The Supreme Court and Congress really need to either reaffirm the Quill decision or set new rules.

The IRS is broken, that’s for sure. But the IRS is a symptom. The “disease” is the tax code. I think that’s absolutely right. And for me, this latest “scandal” concerning the IRS is going to make it impossible to reform our tax code anytime soon.

The Iowa General Assembly nears the end of its annual rampage. While it finally did something to improve a bad commercial property tax system, it managed to make an already awful income tax a little worse.

The Iowa Senate cleared a property tax plan (SF 295) yesterday to reduce commercial property assessments by 10%, with additional property tax credits for smaller businesses. Unfortunately, the price was to more than double Iowa’s version of the fraud-plagued Earned Income Tax Credit and, it appears, to clutter up the 1040 with additional petty tax credits — those these provisions are apparently part of a separate bill.

As if that weren’t enough abuse to the income tax, the Senate also increased Iowa’s tax credit corporate welfare budget by $50 million (HF 620) by increasing the amount of tax credits that the economic development bureacracy can hand out. They sweetened the corporate welfare pot by enabling the diversion of employee withholding to local crony capitalist slush funds economic development funds.

Another bill, HF 625, increased the popular school tuition credit, a poor substitute for true school choice.

While the politicians will pat themselves vigorously on the back, the net result isn’t very exciting. Yes, lower rates for commercial property are needed. But now Iowa’s dysfunctional income tax is larded with even more corrupt special interest favors, which will make it that much harder to ever enact a system that makes sense for taxpayers without lobbyists and connections.

Our average combined rate of 39.1 percent is the highest in the industrialized world. In an increasingly globalized world, this matters more today than it did the last time we reformed the code in 1986. Today the U.S. has to compete with countries around the globe who are constantly improving their tax codes. When the U.S. fails to do so itself, American consumers, workers, and shareholders lose out.

Politicians created the current corporate tax system and the current system is broken. If you are going to set out a menu of options for corporations to reduce their tax burden, don’t be surprised or upset that corporations take advantage of them.

It’s too bad that the cost of a sensible property tax is a big increase in a program that is a poverty trap for honest taxpayers and a pinata for thieves. The phase-outs of the EITC result in shockingly-high marginal tax rates on each additional dollar earned by relatively low-income taxpayers.

The EITC is refundable, which means it is really a welfare program run through tax returns. About 25% of the EITC is claimed “improperly,” which is a nice way to say it’s stolen. The annual cost of the Iowa EITC boost is estimated at $35 million, so the price of fixing a broken commercial property tax regime is an $8 million annual thief subsidy. So while the politicians celebrate their great compromise, Iowa’s petty thieves also have occasion to raise a glass, filled by you.

It is unlikely that Republicans will find Paul’s smoking gun, but the IRS scandal is almost certainly the result of political bias on some level. It is hard to believe that a group of officials would innocently pick terms like “Tea Party,” “patriot,” and “9/12” to single out organizations for additional scrutiny. It would be incredible to find such disinterested tone-deafness even in the most politically insulated of civil servants (and the IRS is far from insulated).

I doubt the White House left fingerprints on IRS efforts to harass political opponents (though it didn’t lift a finger to stop it). That leads to an even more depressing possibility: that the IRS went out its way to beat up on the President’s opponents on its own. Nobody blew the whistle. That means IRS management is so corrupt and political that it would go after the administration’s political opponents with only a wink and a nudge. And anybody who doesn’t think this was politically-motivated is kidding themselves.

And the IRS scandal was a subversion of democracy on a massive scale. The most fearsome and coercive arm of the administrative state embarked on a systematic effort to suppress citizen dissent against the party in power. Thomas Friedman is famous for musing that he wishes America could be China for a day. It turns out we’ve been China for a while.

Politicians advance plan to allow politicians to give more tax money to private businesses. From TheGazette.com:

Iowa communities would be able to designate special 25-acre development zones and use a share of sales tax and hotel-motel tax revenues to assist private projects of at least $10 million under legislation that’s getting bipartisan support.

House File 641 would establish reinvestment districts designed to spur development of “big ideas,” said Sen. Matt McCoy, D-Des Moines, who led a Senate Ways and Means subcommittee that revamped the bill representatives approved 87-9 last month.

This is, of course, an awful idea. Politicians are notoriously bad at allocating investment capital, and they tend to make sure it goes to their cronies and contributors. But when the state’s Governor, a member of the purported small government party, does an end-zone dance over a giant federal subsidy to a private utility controlled by a billionaire, the battlefield is left to the crony capitalists. The House version of HF 641 passed 87-9.

For capital gains, the current law is already out-of-step with international standards. After the fiscal cliff, combined state and federal capital gains rates increased from 19.1 percent to 28 percent. This is more than 10 percentage points higher than the international average. One suggestion, of course, is to tax capital gains at the rate at the 1986 rate of 28 percent. This would push America’s average combined federal and state capital gains rate to more than 35 percent, more than double the international average.

The Iowa House of Representatives advanced two corporate welfare provisions yesterday.

SF 433makes it easier for businesses with “pilot projects” to keep employee withholding under a “target jobs withholding tax credit” program. It never says what exactly the “pilot projects” are supposed to prove — maybe if you divert employee withholding to the employer, they like that? This additional clutter to Iowa’s already byzantine tax law passed 97-2, opposed only by Bruce Hunter (D., Des Moines), and Charles Isenhart (D., Dubuque).

Legislation aimed at helping some Iowa border communities compete with neighboring states is on its way to the governor.

The targeted jobs program allows qualifying businesses to apply for state withholding tax credits if they plan to relocate or expand in Iowa, provided they are creating or retaining jobs.

“Creating or retaining” jobs? Doesn’t that happen whenever you hire someone? If you want Iowa to “compete” with neighboring states, make the whole tax law competitive. It’s not just border cities who suffer from a bottom-tier business tax climate.

SF 436expands the amount of Historic Rehab Credits available, increasing the distortion of property markets by subsidy, generally for the benefit of the well-connected developers who know how to play the game. This one passed 97-2, with only Rep. Hunter and Rick Olson (D., Polk) voting no.

As for actual good policy — simplifying the law, lowering rates, and doing something for people without lobbyists — nothing. The closest thing to it this session, the flat Alternative Maximum Tax (HF 478), is dying in the Senate. So once again it looks like the legislature will go home having only added more barnacles to the Iowa income tax.

Legislator insists that thieves get $11 million as price of property tax deal. As Iowans pay their 2012 balances due on today’s state income tax deadline, they may want to take a moment to ponder how careful the legislature is about spending the money they are sending in.

The Des Moines Register reports that Senator Joe Bolkcom demands an increase in the Iowa earned income credit as the price of a property tax bill:

Sen. Joe Bolkcom, D-Iowa City, chairman of the tax-writing Senate Ways and Means Committee, spoke at a Statehouse news conference sponsored by The Coalition for a Better Iowa, which released a booklet with the stories of Iowans who have been helped by the earned income tax credit. About 200,000 Iowa working families receive the tax credit, which assists households with incomes under $45,000.

Senate Democrats want to raise the earned income tax credit from 7 percent now to 20 percent at a cost of about $55 million annually.

Both Sen. Bolkcom and the Register fail to mention the massive fraud rate of the earned income tax credit. The Treasury Inspector General for Tax Administration this month reported:

The IRS estimates that 21 to 25 percent of EITC payments were issued improperly in Fiscal Year 2012. The dollar value of these improper payments was estimated to be between $11.6 billion and $13.6 billion.

Applying that fraud percentage to Sen. Bolkcom’s proposal will result in $11.5 million to $13.75 million in “improper” — mostly fraudulent — Iowa EITC payments. Remember that the EITC is a “refundable” credit, which means that if it exceeds your tax, the state writes you a check. It’s a spending program, a welfare program.

I would say it takes a special kind of legislator to demand $55 million in spending knowing that it’s an appropriation of at least $11 million to thieves, but really it just takes a run-of-the-mill legislator spending your money instead of his own.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

Only somebody who doesn’t prepare tax returns would say something this stupid. The TaxProf links to this from a University of Wisconsin academic:

This Article analyzes the ongoing structural transformation by observing and explaining the advantages that accrue from pursuing social and regulatory objectives through the tax code. In particular, this Article identifies a number of legislative and normative advantages that tax-embedded policies offer.

The tax law has one important job: to raise revenue. If this author had ever done business tax returns for a living, she would know what a challenge it is to simply determine taxable income. If she had ever helped a client through an IRS audit, she would know how difficult it is for the agents to simply work through the accounting, let alone run a bunch of social programs on the side. The author should be made to spend three years working at a storefront tax prep business to learn the chaos her views cause outside the faculty lounge.

Baucus’s shift to the right in the last few months (which people had assumed was positioning for the election next year) has antagonized more than just progressives. It seems his Senate colleagues are growing frustrated as well.

And that will severely hamper the chances that a major tax reform bill will make it to the Senate floor.

When you have high tax rates, you make taxpayers highly-motivated to carve out exemptions for themselves. That’s how you get things like HF 633, which cleared the Iowa House of Representatives this week.

The bill would allow employee-owners of businesses to make a one-time election to exclude from Iowa taxable income gain from the sale of employer stock. From the bill (my emphasis):

(a) An employee-owner is entitled to make one irrevocable lifetime election to exclude the net capital gain from the sale or exchange of capital stock of one qualified corporation which capital stock was acquired by the employee-owner on account of employment by such qualified corporation and while employed by such qualified corporation.

(b) The election shall apply to all subsequent sales or exchanges of the elected capital stock, provided it is capital stock in the same qualified corporation and was acquired on account of employment by such qualified corporation and while employed by such qualified corporation.

What is “Capital stock?” From the bill:

“Capital stock” means common or preferred stock, either voting or nonvoting. “Capital stock” does not include stock rights, stock warrants, stock options, or debt securities.

What is a “qualified corporation?” The bill says that would be:

(A) The corporation has been in existence and actively doing business in this state for at least ten years.

(B) The corporation has at least five shareholders.

The “ten year” thing would seem to be an attempt to pair up somehow with the ten-year capital gain exclusion for ten-year businesses — but unlike that provision, it lacks a ten-year holding period and material participation requirement. The “five shareholders” requirement is baffling — and could be easily be avoided by minor share gifts before a sale to create shareholders.

What does it mean to acquire shares “on account” of employment? The bill doesn’t say. Would exercising options under a stock option plan qualify? Is it limited to employer stock bonus plan stock? What if an employee buys stock as an investment? What about founding owners? The bill is unclear, and it shouldn’t be.

I am guessing this bill is being driven by the executives at publicly-traded Iowa corporations, and maybe by Hy-Vee executives, who benefit from employee ownership. While you can’t blame them for trying to carve themselves a break, it would be much better for the rest of us to eliminate this sort of special favor, make the law simpler, and lower rates for everyone. In other words, The Tax Update Quick and Dirty Iowa Tax Reform Plan.

Iowa’s tax law: is there anything it can’t do? The 100 supergeniuses in the Iowa House of Representatives have decided that our dozens of economic development tax credits and breaks just aren’t quite enough to make us creative. To get us off the sofa they Iowa House yesterday passed HF 615 to modify the “innovation fund investment tax credit.” What, you didn’t know there was such a thing? No wonder you can’t innovate your way out of a wet paper bag, Iowa!

Naturally, this requires a political “board,” in this case the Iowa Economic Development Authority. That spells “innovation” right there! And they start out with a new innovation for the innovation tax credit: make it bigger! As explained in an early version of the bill:

Under current law, the economic development authority is required to issue nontransferable tax credit certificates equal to 20 percent of a taxpayer’s equity investment in an innovation fund. The tax credits available for issuance are under the aggregate tax credit limit for certain economic development programs in Code section 15.119, and are limited to a total of $8 million per fiscal year. The bill modifies the credit by removing the 20 percent limitation and specifying that for each fiscal year a total of $8 million in innovation fund investment tax credit certificates shall be issued by the authority to one or more nonprofit corporations operating an innovation fund.

The bill provides that tax credit certificates may be transferred no more than two times and establishes procedures for transferring the credit to another person.

So: the state would now be able to pay up to 100% – or more! of somebody’s investment in an “innovation fund.” And the credits may now be sold — just like in the film credit program! I can practically feel the innovation already.

The “Innovation Fund” web site makes it look like a slush investment fund for the state to funnel money to innovators. Because Iowa is good at running investment funds! Oh, wait:

A decade after the state tried to spark investment in young innovative companies, Iowa taxpayers will foot a $26 million bill — and potentially more — to meet the program’s obligations.

State attorneys reached an agreement in August to avoid a lawsuit from two lenders who backed the Iowa Fund of Funds, a program lawmakers created in 2002 to attract more venture capital investment in Iowa startups.

So the answer to a disastrous and failed tax credit program to jump-start innovation is a new tax credit program to jump-start innovation — only this time with transferable credits! That’s the ticket!

The Iowa House passed HF-615 by only a narrow margin of 97-2. The only no votes were Bruce Hunter of Des Moines, who consistently opposes these boondoggles, and Rick Olson, a Polk County Democrat. That’s one more “no” than for the film credit program, which passed the House 95-1. So progress, anyway.

Try a real innovation. Get rid of all of the useless economic development credits and tax breaks. Stop paying people to be our friends. Get rid of the futile corporation income tax. Pass a simple low-rate tax law for everyone, like the Quick and Dirty Iowa Tax Reform Plan.

Camp’s Proposed Passthrough Unification Is Not a Step Toward Corporate Integration is the headline of a gated article in this mornings tax notes. Maybe. But the proposal for a pass-through system with mandatory withholding looks to me like a close cousin to a corporate tax with a dividends received deduction. In both cases the tax is paid currently at the entity level, with only one level of taxation. The main difference is the formality of which entity claims the credit for the tax paid.

First Iowa, now New York: Rendering the U.S. Supreme Court Irrelevant (Cara Griffith, Tax.com). Like Iowa in its KFC decision, New York says the world has changed since the Supreme Court ruled that you had to have physical presence in a state before the state could tax you, and now “economic presence” is enough. This makes Cara Griffith uneasy:

We are on a dangerous path if we allow state courts to take this approach. The U.S. Supreme Court’s 1992 opinion in Quill Corp. v. North Dakota remains good law. Unless and until it is overturned (or federal legislation is enacted to the contrary), the bright-line physical presence rule established in Quill is the law of the land.

Not your corporate welfare. Just ours. Iowa Senate taxwriters have been eloquent in criticizing the corporate welfare famously doled out to fertilizer companies over the last year. It turns out, though, that not all corporate welfare is bad, to them. Just that proposed by the other party. The Senate Ways and Means Committee advanced a set of its own welfare programs yesterday, including:

SF 238, which would provide a 30% tax credit (subsidy) “for persons who construct, install, and place in service an electric vehicle facility or a natural gas vehicle facility.” So if you buy a Chevy Volt, Senate Ways and Means wants to pay 30% of the cost of installing special plug-ins.

SSB 1240, which “increases to $50 million from $45 million the amount of historic preservation and cultural and entertainment district tax credits.” These are a cash cow for well-connected developers and rehabbers.

SF 205, which opens up an existing program to divert withheld employee taxes “to create economic incentives that can be directed towards business.” The bill “removes the requirement that an employer…be located in an urban renewal area.” In other words, it makes it just another “incentive” slush fund to pay people to be our friends.

So it’s not a principled opposition to business subsidies. They just want different ones.

The article takes for granted that the costs the regulations will impose will exceed the benefits:

Knowledgeable tax return preparers—who are reminded each year through education requirements to conduct effective due diligence on small businesses—can have a much greater impact on compliance than IRS auditors.

That makes an unwarranted assumption: that the IRS can create “knowledgeable tax return preparers.” It can’t. It can make people fill out paperwork, go through the motions of paying for CPE, and take meaningless open book literacy competency tests, but it can’t make anybody competent.

Few of us would encourage criminal gangs to work out their disagreements so they could be more effective criminals. Yet many well-meaning folks think it’s a good idea for politicians to be “bipartisan.” That can be the public policy equivalent of a gang truce. Remember that the disastrous Iowa Film Credit enjoyed wide and bipartisan support.

Now they’ve reached across the aisle at the state house to take more money out of our pockets for the benefit of the well-connected and well-lobbied. From Radio Iowa:

Key lawmakers from both political parties say it’s likely the Iowa legislature will boost the amount of state tax credits available to lure new businesses to Iowa.

This year state officials can offer a total of $120 million in state tax credits for a variety of business expansion projects. Lawmakers appear poised to raise that to $185 million for next year.

Isn’t that wonderful. Taking money from the people who already pay taxes at some of the highest rates in the country to lure and subsidize their competitors. Well done, guys. It’s like bringing your wife’s purse to the bar to buy drinks for the girls. It’s not impressive. They may take the free drinks, but they realize you’ll raid their purses if you get the chance. And any girl you do get that way probably isn’t a real prize.

WCFCourier.com says there is also bipartisan agreement to enrich the historic tax credit program, which allocates construction capital to well-connected local developers at the expense of their non-subsidized competition.

Details, details. Details matter when you claim a childcare tax credit on your Iowa return. Like, for example, the address of your child care provider from a denial of an Iowa tax protest released today

The Department reviewed your 2009 Iowa individual income tax return and denied the child care credit. Your protest claims you provided adequate documentation to support the credit. After our review, our position is that we believe Form 2441, the tax form for child care expenses, is fraudulent. The owner/occupant at the address reported as that of the provider stated he does not know and has never heard of [your child] and there has never been any child care business operating at his property. It is unreasonable that you would not know the address of where your children are while you are at work. Therefore, your protest is denied.

In fairness, my parents often had no idea where I really was when they were at work…